Single-digit inflation won’t guarantee lending rates drop — Analyst

A Financial Analyst and Lecturer at the National Banking College, Francis Owusu-Acheampong, has said it is too early for it to be thought single-digit inflation will lead to a fall in lending rates, as the ‘fundamentals’ are still not strong to support it.

His comments come on the back of the Ghana Statistical Service (GSS) announcing last week that inflation has dropped from 10.4 percent in March to 9.6 percent in April.

The former banker told the B&FT that banks are still reeling under high operational costs, which will make it impossible for them to bring their lending rates down even as inflation is reducing.

“The lending rate is not only dependent on the inflation rate. It is also a matter of the cost of the banks’ operations. And when you break the banks’ operations down, the biggest component is the NPLs and the second issue is the cost of doing business itself,” he said.

“The cost of doing business is also broken down to overheads, rentals, electricity, personnel cost, among others. No one can tell me those costs have gone down significantly, to the extent that a drop in the inflation rate will bring lending rates down.”

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Worsening the situation for the banks, he said, is the short-term nature of a huge chunk of the deposits – which makes it expensive.

Ghanaians, he explained, have not developed the appetite for saving over the long-term or depositing for the long-term.

“We are all short-term inclined. If you look at the banks’ balance sheet, the current account component is usually about 80-90 percent of the deposits…and that makes it expensive. And because of competition, some banks are now even paying interest on current accounts.

“So, until we get cost-effective deposits, it would be premature for interest rates to go down in tandem with the inflation rate,” he said.

The April inflation rate is just 0.7 percent shy of government’s end of year target of 8.9 percent.

The Bank of Ghana will also announce a new policy rate later this month. At its last MPC meeting, it reduced the policy rate from 20 to 18 percent, citing an ease in inflationary pressures.

“The disinflation process continued to firm-up over the first two months of the year, with significant moderation in price pressures. Both headline and core inflation broadly trended down, alongside easing inflation expectations – an indication that the disinflation process remains well-anchored,” said Dr. Ernest Addison, Bank of Ghana Governor.

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“The Committee noted that the current inflation forecast provides scope for monetary policy to realign interest rates, translate the disinflation gains achieved so far to the market, and reinforce the fiscal consolidation process by easing the burden of interest payments on the budget. Under these circumstances, the Committee decided to reduce the monetary policy rate by 200 basis points to 18 percent,” he added.

Mr. Owusu-Acheampong argues, however, that despite the central bank’s expectation the fundamentals on which inflation is dropping are not stable enough to guarantee a reduction in the banks’ lending rates, should inflation fall further.

“Yes, it is true that inflation is coming down; but what are the expectations? What are the pillars supporting the fall? Will those pillars continue to stand in the future so as to build an expectation that, in the next six months, inflation is going to fall? If these were so, then the banks would also follow that in tandem.

“But for now, the fundamentals don’t look like they have changed significantly. The fundamentals have not adapted to have a stable outlook, and therefore no one should expect a spontaneous reaction from banks to reduce their lending rates,” he said.

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